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  1. $400 billion forex reserve is good, but just getting there not enough

$400 billion forex reserve is good, but just getting there not enough

While the double digit export growth in August is a good sign, the government needs to keep a close watch on gold imports and develop strategy to boost areas like agri-exports to curb trade deficit.

By: | Updated: September 18, 2017 9:05 PM
The good news is that gold imports are expected to go down further in coming months as jewelers have restocked already, but the demand may pick up again going ahead if good monsoon increases rural demand. (Reuters)

While the double digit export growth in August is a good sign, the government needs to keep a close watch on gold imports and develop strategy to boost areas like agri-exports to curb trade deficit.

While India’s forex reserve crossing $400 billion is certainly a reason to cheer about, the Reserve Bank of India (RBI) and government must keep in mind that the boost, which can now take care of the country’s imports for over one year, has been mainly supported by the capital flows and is not because of trade surplus.

According to the latest data released by RBI, net foreign direct investment doubled to $10.2 billion in the April-June period from $5 billion in the previous quarter, while portfolio investment is continually on the rise – the credit for rise in foreign inflows must go to the NDA government led by prime minister Narendra Modi.

India’s trade deficit, however, was at $11.6 billion in August as against $7.7 billion in the same month last year, staying around $11.4 billion recorded in July this year. This means that the RBI will come under pressure to protect rupee by selling dollars, the moment money starts flowing out.

The government and RBI, therefore, must look at improving the quality of forex reserves by focusing on curbing the gap between imports and exports – this will require muted gold imports and a sustained export growth, which crossed double-digit in August, but remains a challenging job.

Thanks to the pick-up in gold imports ahead of the implementation of the goods and services tax (GST) from July 1, the country’s current account deficit (CAD) jumped to four-year high of 2.4% of GDP in the April-June quarter from 0.6% in the January-March quarter.

This needs to be kept in mind while analyzing the August exports and imports growth of 10.3% and 21.02%, respectively due to higher crude oil prices, which crossed $50 per barrel, especially because of the fact that even after moderating from the elevated level of $4.95 billion in May this year, gold imports increased by 69% to $1.9 billion in August.

The good news is that gold imports are expected to go down further in coming months as jewelers have restocked already, but the demand may pick up again going ahead if good monsoon increases rural demand.

Even though the CAD of 2.4% of GDP in the first quarter of FY18 may not pose a big concern as it is expected to remain within a comfortable level for the full year, it is high time the government formulated a strategy to capitalize on the gains made in areas like engineering goods exports, while promoting segments like agriculture and allied products exports, which garnered $24.5 billion in FY17.

Commerce and industry minister Suresh Prabhu is pushing for the creation of a global supply chain for the Indian agriculture, which is as critical here as for other sectors.

Tapping global market for the Indian agri-produce, which though will require substantial private sector investment in infrastructure like storage facilities and packaging, will also help in attaining PM Modi’s goal of doubling farmers’ income.

It may take time, but along with the measures to raise productivity levels of the exports, this can be a big helping hand in bridging the trade deficit.

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